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1QFY12 results
Wipro’s Jun-11 quarter results furnished further proof of Wipro’s financial
underperformance. Although Wipro’s re-organisation was wrapped on a
tight schedule, continued revenue misses and modest guidance points
towards a much longer wait before the new organization structure can
translate into financial performance. Moreover, sector-wide demand
confidence is also on hold due to the uncertain macro. Despite over 6%
YTD under-performance against the Sensex, an earnings downgrade cycle
and the concomitant risk to valuations from a riskier outlook will keep
Wipro’s stock performance muted. We stay cautious on all tech stocks
and have no positive rating in the sector. Underperform stays on Wipro.
Topline woes likely to continue
Jun-11 quarter was a big miss on the topline (+0.5%QQ in $-terms).
Revenues declined 0.3%QQ in constant currency terms despite a US$10m
booster from consolidation of SAIC acquisition. Wipro’s sequential revenue
growth has now been at or near the bottom of Tier-1 peers for 9 out of the
last 10 quarters (Fig 2) and we do not see that changing through FY12. A 2-
4%QQ growth guidance for Sep-11 quarter (0-2%QQ organic) indicates that
momentum remains slow and much of the onus of achieving FY12 street
expectations now rests on 2HFY12. However, Wipro’s hiring trends (~2,600
net organic hires) inspire little confidence on this front. The current revenue
trajectory implies that Wipro will likely grow slower than the industry growth
rate (16-18%YY per NASSCOM) despite benefits from SAIC acquisition.
Margins will come under pressure ahead
Margin performance (IT Services) for the quarter came in better than
expected; 10bpsQQ decline c.f. expectations of 60-100bpsQQ decline. Much
of the upside was driven by better currency realisations and improvement in
utilisations. However, we see these factors reversing in 2QFY12 and becoming
headwinds to margins. Moreover, full quarter impact of wage hikes will further
depress margins. Decline in constant currency realisations belies the
optimism on industry-wide pricing, which was prevalent ahead of the results.
getting price hikes in the current environment is much tougher than thought
earlier and this could have further implications for FY12 margin performance.
With volume growth prospects also remaining sombre, margin benefits from a
favourable employee pyramid will also be limited.
Stock up-move demands better financial performance
We have seen an urge on the street to play Wipro's valuation discount to
peers Infosys and TCS. In our view, Wipro deserves to trade at a discount
given its inferior financial performance. Jun-11 quarter performance and Sep-
11 guidance further strengthens that view. Wipro's revenue growth has
lagged both peers Infosys and TCS in FY10 and FY11 and a poor start to FY12
implies an encore this year as well. Underperform stays.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
1QFY12 results
Wipro’s Jun-11 quarter results furnished further proof of Wipro’s financial
underperformance. Although Wipro’s re-organisation was wrapped on a
tight schedule, continued revenue misses and modest guidance points
towards a much longer wait before the new organization structure can
translate into financial performance. Moreover, sector-wide demand
confidence is also on hold due to the uncertain macro. Despite over 6%
YTD under-performance against the Sensex, an earnings downgrade cycle
and the concomitant risk to valuations from a riskier outlook will keep
Wipro’s stock performance muted. We stay cautious on all tech stocks
and have no positive rating in the sector. Underperform stays on Wipro.
Topline woes likely to continue
Jun-11 quarter was a big miss on the topline (+0.5%QQ in $-terms).
Revenues declined 0.3%QQ in constant currency terms despite a US$10m
booster from consolidation of SAIC acquisition. Wipro’s sequential revenue
growth has now been at or near the bottom of Tier-1 peers for 9 out of the
last 10 quarters (Fig 2) and we do not see that changing through FY12. A 2-
4%QQ growth guidance for Sep-11 quarter (0-2%QQ organic) indicates that
momentum remains slow and much of the onus of achieving FY12 street
expectations now rests on 2HFY12. However, Wipro’s hiring trends (~2,600
net organic hires) inspire little confidence on this front. The current revenue
trajectory implies that Wipro will likely grow slower than the industry growth
rate (16-18%YY per NASSCOM) despite benefits from SAIC acquisition.
Margins will come under pressure ahead
Margin performance (IT Services) for the quarter came in better than
expected; 10bpsQQ decline c.f. expectations of 60-100bpsQQ decline. Much
of the upside was driven by better currency realisations and improvement in
utilisations. However, we see these factors reversing in 2QFY12 and becoming
headwinds to margins. Moreover, full quarter impact of wage hikes will further
depress margins. Decline in constant currency realisations belies the
optimism on industry-wide pricing, which was prevalent ahead of the results.
getting price hikes in the current environment is much tougher than thought
earlier and this could have further implications for FY12 margin performance.
With volume growth prospects also remaining sombre, margin benefits from a
favourable employee pyramid will also be limited.
Stock up-move demands better financial performance
We have seen an urge on the street to play Wipro's valuation discount to
peers Infosys and TCS. In our view, Wipro deserves to trade at a discount
given its inferior financial performance. Jun-11 quarter performance and Sep-
11 guidance further strengthens that view. Wipro's revenue growth has
lagged both peers Infosys and TCS in FY10 and FY11 and a poor start to FY12
implies an encore this year as well. Underperform stays.
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